Why America Has a Strong Position in the New Bretton Woods Negotiations
By JC Collins
This article was originally posted on December 29, 2015.
Understanding how balance of payments work is key to understanding the monetary leverage which one country holds over another. Based on the modern method of money creation, the functionality of balance of payments is really a zero sum game.
Allow me to explain.
The importance of aligning all nations within the same structural central banking framework becomes obvious when the fiat method of money creation is considered. The intent of this post is not to debate the merits and faults of such a system (eg. Fiat money creation allowed for the expansion of the money supply which funded the industrial revolution, but also indebted nations to each other, and in turn, to an invisible web of international banking interests), but to demonstrate the ebb and flow of wealth as it shifts around the world.
As we know here on POM, wealth is defined as the accumulation of human time and labor.
This is why human time and labor is consolidated under ideologies (eg. Socialism, democracy, communism, etc.), which are framed with borders around cultures, religions, and historical significance. Time and labor are consolidated as a measure of GDP. World GDP can be considered the total accumulation of human time and labor.
More accurately, world GDP can be considered the measurement by which human time and labor is used to manage the debt which is a product of the money creation process. This money creation process is practiced by all nations. As such, the movement of human capital, or resources, being time and labor, is allocated across borders through multiculturalism. This can also be considered as a form of socioeconomic agriculturalism, or reallocation of human resources. Much like a farming technique.
But I digress from the original intent of the article. It happens.
When all GDP is consolidated, we find that the ability to manage debt is allocated by shifting wealth from region to region, or country to country. The balance of payments is the method of measuring the complexity of the debts of nations.
Let’s explore further.
Every so often we hear that China will dump its holdings of US government debt. But what isn’t explained is that the People’s Bank of China had to borrow renminbi (sort of, remember all money is created through the issuance of debt) in order to buy that American debt. This statement alone will bring the article into clear focus for many readers.
Before moving on further let’s consider that there is only finite amount of wealth/debt/human time and labor (let’s call it GWM, Gross Wealth Management) in the world. The allocation of this GWM is determined by a methodology which we will explore in further detail in another post. For now we will focus on the balance of payments as the means to measure the GWM ability of countries and the existing international monetary framework.
As such, a deficit in one country will mean a surplus in another. Balancing the deficits and surpluses between nations is the goal of a multilateral monetary framework. And considering the debt method of money creation, holding a large surplus is just as detrimental as holding a large trade deficit.
The US government, which has used their domestic dollar as the international reserve asset, was forced to expand dollar denominated debt to meet the demands of the international GWM. The interesting part of this formula is that other governments and central banks had to print an equal amount of domestic currency in order to purchase that US government debt.
Based on exchange rates, the People’s Bank of China had to create as many renminbi as dollars. What this means is that the large surplus and USD denominated reserves which China currently holds cannot be considered wealth which is free and clear of debt. China had to borrow renminbi in order to purchase dollars.
When this reality is considered, we can make the determination that China’s large reserves would be useless when used as a financial weapon against America. Any analysis which is based on such a strategy by China can be considered inaccurate and not considerate of the actual functioning of the international monetary system.
If China so-called dumped their large holdings of US government debt, it would cause massive inflation within the domestic Chinese economy. How so? Considering that China used RMB debt to purchase USD debt, once the RMB denominated funds are pulled out of US government debt, these renminbi would flood back into China and cause inflation. Not to mention that this would hammer the Chinese exporting sector, which is something the Chinese authorities are keen to avoid as they manage the transition from a trade exporting economy to a trade services economy.
Not to mention that China dumping US government debt would only serve to reposition the US deficit by shifting capital flows elsewhere. Increasing and reducing bond yields would work in tandem with exchange rate adjustments to shift this debt around, like cards in a shuffle game. Chinese capital flows would shift elsewhere, say the EU, which would than see its own capital flows to the US increase. It’s only the shifting of the balance of payments. Nothing more.
The reduction and elimination of reserves altogether is where the international monetary system is moving in the future.
China can use these large reserves to protect itself from a currency crisis. The PBoC could sell dollars to support the renminbi, which is something they did several times throughout 2015. This was completely misunderstood by most, with many headlines, both mainstream and alternative, fanning the flames of false dollar dumping.
China can also use the reserves to protect itself from an external debt crisis. This is the probable use of the large surplus, as a process of sovereign debt restructuring will begin in the coming months. The substitution of these reserves within an IMF reserve diversification, or reduction, strategy will benefit China the most.
These reserves also cannot be used by China to address a domestic financial crisis. For many of the same reasons.
Exchange rate manipulation is one of the only independent means which nations have to influence the ebb and flow of GWM. It is feasible to imagine exchange rates as the King Rat of international monetary functionality. This is a strong insinuation of the framework which is used by the international banking interests.
Let’s break this down into more detail.
The PBoC continues to keep the renminbi weak against the dollar for the purpose of purchasing US dollars which are accumulated by Chinese business and exporters. The People’s Bank of China borrows renminbi in order to purchase these dollars.
Once purchased, the PBoC cannot sell renminbi as it would be inflationary. Same as the US with dollars. In order to prevent excess inflation, the PBoC issues new debt and raises the required reserve ratio of capital held by Chinese banks. This has led to the increase of domestic debt within China.
The effect of all this is that the PBoC owes renminbi which it sold at low valuations, based on the exchange rate, and owns dollars at high valuations, based on the same exchange rate.
This is why a substitution and reduction in reserve accumulation is required. Unless the world completely moves away from the fiat method of money creation, which is something I do not predict happening, the monetary framework will need to be restructured for the purpose of eliminating reserve accumulation and seeking an equilibrium in the balance of payments through some form of multilateral reserve asset. – JC
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